14

FISCAL POLICY AND ECONOMICSTABILITY

«Fiscal policy is concerned with the manner in
different elements of public finance, while still which all the
uith carrying out their duties (as the first duty ofprimarily concernt d
a tax
monev), may collectively be geared to forward the aims of theiseconomic
to rais,
policy." - Mrs. Ursula K. Hicks.
Introduction
The history of public finance indicates that fiscal policy is
to change from time to time. According to classical subjcct
cconomists the
budget should be balanced or should provide savings. At that time free
cconomy was in existence and the best government was one which
governs the least and has minimum interference in the economic field.
There were minimum restrictions and controls, and the fiscal policy was
functioning independently. However, after the world-wide depression of
1930, the circumstances brought changes in the fiscal policy.Now fiscal
policy is considerced an cffective tool in the hands of the government for
bringing economic stability, price control, full employment and
cconomic development in a country.
TRADITIONCONCEPT OF FISCAL POLICY
The traditional or classical cconomist firmly believed in the policy
of laissez faire. The government should not interfere in the cconomic
field. There should be frce operation of market forces. The J. B. Say's
policies which
Law r market was corner stone of all economic
propounds that supply creates its own demand and, therefore, the
question of over-production or under-production or involuntary
unemploymen1 does not arise. They were of the opinion that tree
Operation of market forces would achievye full employment and ensure
Opumum allocation of resources to different sectors of economy
cOuntry. The government should perform only minimum essetia
functions like maintenance,of neace and law and order in the country atd
sateguard the country against foreion attack, According to A. H. Hansen,
corresponds tothe maxim
The classical Concept of a sound fiscal policy the reducton o
of a neutral fiscal policv, It is called for two things : (i)
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public expenditure to the utmost minimum possible limit, and (ii) a tax
structure which disturb the pricing system as little as possible, including
the pricing of factors of production, thercby lcaving intact the relative
distribution of income as it would be in a tax frcc society."" For the
principle of sound finance, they advocated that government is the best
which spend the lcast and imposes lowest amount of taxes. They
advocated the principle of abalanced budget. They considered surplus or
a deficit budget as undesirable. According to classical cconomists, a
balanced budget was a guide for the transfer of resources from private to
public sector. Classical cconomists laid down the following principles of a
sound finance.
(1) A government should tax the least and spend as littlc as
possible.
(2) Taxation should be minimum as it adverscly affects production.
(3) Government expenditure in economic field is not productive,
but unproductive.
(4) The government should not resort to borrowing, as it may
involve additional taxation for the repayment of loans and
interest on borrowed funds and this additional taxation may
adverscly affect productions.
(5) If the policy of balanced budget is not followed, public
expenditure may result into wastes and inflationary tendencies.
MODERN CONCEPT OF FISCAL POLICY
prnciple
MEANING AND DEFINITION OF FISCAL POLICY
The objective of every government is always to have abalanced
hudget. However, generally the expenditure exceeds the rcvenue income
of the government. In order to meet this situation, the government
imnoses new taxes or increases existing taxes, takes internal or external
Ioans or resorts to deficit financing by issuing fresh currency notes. Thus,
the policies of imposing taxation, taking loans or deficit financing are
collectively known as fiscal policy'. According to Paul Samuelson,
«Fiscal Policy means public expenditure and tax policy." According to
Arthur Smithies, Fiscal Policy is a policy under which government uses
its expenditure and revenue programmes to produce desirable effects
and avoid undesirable effects on the national income, production and
employment." The significance of fiscal policy as an instrument of
economic control was first emphasised by Prof. J. M. Keynes in his famous
book -titled General Theory of Employment, Interest and Money. policy.
However, Prof. Keynes never gave any formal definition of fiscalused the
Aworking definition can be derived from Keynes' writings. He savings
on
term fiscal policy when referring to the influence of taxation
financed by loans from the
and of government investment expenditure action as a
public. He looked at fiscal policy as one form of State
balancing factor. Thus, for the purpose of interpretation of Keynes
public finance as
thought we can define fiscal policy as a policy that uses Government
abalancing factor in the development of the economy."
activities as regards spending, taxing, borrowing, deficit financing and
budgeting are known as fiscal activities and the purposeful manipulation
of these activities to attain desired objectives, say,economic stability,
policy."
rapid economic growth and full employment-is known as fiscal public
"By a positive fiscal policy, we mean the prOcess ofdown shaping
taxation and public expenditure so as (i) to help dampen the swings
of a
of the business cycie, and (in) tocontribute toward the mainte- nance or
inflation
progressive high employment economy free from excessive
deflation" Fiscal policy is fundamentally concerned with the aggregate
effects of public expenditure and taxation on income, output and
employment.
Itis thus, obvious, that fiscal policy deals quite directly with matters
investmnent
which immediately influence the consumption and
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expenditures and hence, the income, output and employment in the
economy.
COMPONENTS OF FISCAL POLICY
The main components of fiscal policy are as follows :
(1) Budgetary Policy. The old classical economists advocated a
policy of balanced and smallbudgets. However, this policy will not help
to tide over depression and unemployment according to Prof. J. M.
Keynes. The need at such a time is to increase the flow of income-stream
into the economy and could be made possible, according to Prof. J. M.
Keynes, only through deficit budgeting. Hence, it is essential that the
gOvernment should incur large deficits in the budget and then meet these
deficits either by borrowing from the banks etc. or through printing fresh
currency notes. It will inject fresh purchasing power in the economy,
helping it to fight depression and employment efectively.
(2) Taxation Policy. In order to fight depression and unemp
loyment, taxation policy of the government, according to Keynesians,
should be so designed as to stimulate both consumption and investment
simultaneously. The only way to do it successfully is to reduce the general
burden of taxation on the community. The commodity taxes should be cut
down to the minimum so as to stimulate consumption on the part of the
public. Further, to promote increased investments, it may also be
essentialto cut down business and corporate taxes.
(3) Public Debt. Public debt can also be employed by the
governmnent as an instrument to fight depression and unemployment. The
deficits in government'sbudgets shall have to be met partly if not wholly
through public borrowings. But while adopting the fiscal policy of public
borrowing (publicdebt), the government shall have to keep the following
two considerations in mind. Firstly, in order to keep the burden of public
debt low, the government should aim at a policy of low interest rates
during depression. Secondly, the government should try as far as possible
to borrow from those sections of the community with whom the funds are
lying idle. The idea is to utilize those idle funds through
borrowing for
productive purposCs.
(4) Public Expenditure. An increase in public
be employed by the government as an expenditure can also
instrument to fight against
depression and unemployment. Increase in public
time may take the following two forms expenditure at such a
(ü) Compensatory Spending. Punp Priming refers () Pump Priming, and
expenditure which helps initiate and revive economic toactivitythat public
in an
economy where stagnation reigns supreme consequent upon
The object is to increase private
investment depression.
through an injection of
purchasing power in the form of an increase in public expenditure. On
the other hand, compensatory spending
expenditure which is undertaken with a view torefers to the government
in private investment. Usually private investmentcompensating the decline
suddenly declines at the
 Fiscal Policy and Economic Stability | 211
time of depression. Under these circumstances, therc is no alternative
beforethe government except to resort to public investmcnt. HowCver,
publicinvestment should be undertaken on a large scale so as to have an
effectiveimpact on the employment situation.
OBJECTIVES OF FISCAL POLICY
Traditional economists were of the opinion that there would be full
cmployment in the economy and the problem of ovcr-production would
ice Thinkers like J. B. Say confirmed this opinion by
never arise.
CMarket'. However, the severe world-wide depression in giving
1930 set 'Laws
aside
of
forever the opinion of traditional economists. Modern economists
directedtheir attention towards the burning problems of over-production
and unemployment. Fiscal policy was used as a weapon to solve both
these problems. Different economists have given different objectives of
fiscal policy, According to Musgrave, "The objective of fiscal policy is
higher employment, stability in prices, balance in trade and increase in
economic development." The main objectives of fiscal policy are aS
follows :
(1) Economic Stabilisation. The first and the foremost objective of
fiscal policy is to eliminate cyclical fluctuations in economic activity and
to maintain it at a stable level. The up-and-down swings in business are
checked by compensatory fiscal action to counteract fluctuations. Strict
steps are taken to control both inflation and deflation and efforts are
made to make the budget more or less balanced over the period of the
cycle.
(2) Economic Growth. The second important objective of fiscal
policy is to maintain acontinuous upward trend in economic activity.
Total outlay is increased in depression but is not allowed to decrease
Correspondingly in boom. Stability continues to be an important aim of
fiscal policy.
(3) Break the Vicious Circle of Poverty. Another objective of fiscal
policy is to break the vicious circle of poverty and to usher in arapid
development of both agriculture and industry.
(4) Provide Full Employment. Fiscal policy is considered as an
effective instrument for reducing unemployment and securing tull
Cmployment. Full employment occurs where there is job available for
prevailing wage rates.
everyone who is fit to work and wants a job at the
saving, investment and capital
J. To accelerate the rates of
formation.
6. To bring stability in prices.
check the concentration of economic
I: lorestrict monopolies and
power in fewer hands only.
8. To establish balance in foreign trade.
development in the country.
2. lohave rapid cconomic
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10. ln case of developed countries the main objective of tiscal
policy is to have long-term stability.
main
n case of underdeveloped and developing countries, the
objectives of fiscal policy are
() promoting the growth of savings and investments, and
(i) reducing income and wealth inequalities.